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One free scan finds every outdated or missing driver and matches the right update for your exact hardware.Free scan · exact hardware matchMulti-level marketing (MLM) is a way to sell goods or services through a network of participants who may earn from sales and recruit others into a “downline.” The label alone does not determine whether a business is lawful. The key question is how its compensation plan works in practice—especially whether it rewards sales to customers outside the network or recruitment and participant purchases.
What is multi-level marketing?
In an MLM, participants distribute a company’s products or services and may recruit additional participants. Those recruits can form multiple levels beneath them, and the compensation plan may pay participants based on sales across those levels.
MLM describes a distribution structure, not a legal verdict. A company’s use of the term “direct selling,” the presence of a real product, or evidence that some retail sales occur does not settle whether its compensation structure is operating as a pyramid scheme.
How does the FTC distinguish an MLM from a pyramid scheme?
The Federal Trade Commission (FTC) examines the plan’s rights, incentives, and real-world operation. Its business guidance discusses the widely cited formulation from In re Koscot Interplanetary, Inc.: participants pay for the right to sell a product and for recruitment rewards “which are unrelated to the sale of the product to ultimate users.” The focus is not just whether a product exists, but what the plan rewards and how participants are encouraged to earn.
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#1 Best Overall
There is no universal percentage test that makes an MLM lawful or unlawful. FTC staff say the assessment is fact-specific and considers the overall structure, marketing representations, participant experiences, compensation plan, and incentives. The FTC’s staff guidance is nonbinding; a legal assessment depends on the facts of a particular business.
Warning signs to check before joining
The pitch focuses on recruiting
Be cautious if presentations spend more time on building a downline, signing up recruits, or earning from participants than on selling to customers who are not part of the network. Ask what specific sales or other activity qualifies each payment, and whether recruiting is necessary to reach higher rewards.
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Income promises depend on exceptional outcomes
Claims about financial freedom, replacing a salary, getting rich, or quitting a job need reliable evidence about what people in the audience typically earn—not just a recruiter’s personal story or lifestyle images. The FTC warns that even claims about supplemental income or working only a few hours can mislead when they do not reflect typical outcomes.
Costs or recurring purchases are unclear
Request a complete list of required and encouraged spending, including products, travel, training, tools, subscriptions, and other fees. Ask whether recurring purchases are needed to remain eligible for compensation. A plan that is difficult to explain makes it harder to assess what you must spend and what you must do to earn.
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Gross commissions are presented as profit
Commissions or sales figures do not show what a participant keeps after expenses. Ask for typical net results, including the number of people who earned nothing, and how the company accounts for costs. FTC consumer advice says, “Most people who join legitimate MLMs make little or no money. Some of them lose money.” That is qualitative consumer guidance, not a single measured industry-wide profit rate.
You are pressured to decide quickly
Do not rely only on an oral explanation from a recruiter. Before paying or signing up, read the compensation plan, income disclosure, and refund and cancellation terms. FTC consumer advice recommends getting the details before buying into a plan.
Questions to ask—and documents to read
Use the same questions for every opportunity you consider. This checklist is a practical way to assess an offer, not a legal test.
- Who buys the product? Ask how much revenue comes from customers who are not participants, and how the company identifies those sales.
- What triggers each reward? Identify whether payments depend on retail sales, recruitment, participant purchases, or a combination. Ask whether recruiting is required for any compensation level.
- What will participation cost? List required and encouraged purchases and fees, including recurring costs, and ask whether they affect eligibility for rewards.
- What do participants typically keep? Request substantiated typical earnings after expenses, with low and zero earners included and the measurement period explained.
- Can you leave and recover money? Read the written cancellation and refund terms before signing or paying.
- Can you take time to review? Get the plan and disclosures in writing; do not let urgency replace scrutiny.
How to evaluate an income disclosure
An income disclosure is useful only if you understand who and what it counts. FTC guidance says earnings claims should be truthful, substantiated, and non-misleading about what people can generally expect. They should account for expenses as well as revenue and rely on reliable empirical evidence, not anecdotes or subjective belief.
When reviewing a disclosure, check whether it includes everyone who joined or only people who met a threshold; whether people with zero or low earnings appear; what period the figures cover; whether the amounts are gross or net of expenses; and whether people who left before that period are represented. Costs may include products, conference travel, tools or services, and training.
FTC staff reviewed publicly available income disclosure statements from 70 MLMs in February 2023. In a 2024 report, staff said most of the reviewed statements omitted low- or no-earning participants from displayed earnings and did not account for expenses, which can exceed income. This finding concerns those 70 reviewed statements; it is not a measured industry-wide net-profit rate.
What is the status of the FTC’s proposed earnings-claim rule?
On January 13, 2025, the FTC announced a proposed Earnings Claim Rule Regarding Multi-Level Marketing and sought public comment on prohibiting misleading or unsubstantiated earnings claims and on possible additional protections. The cited notice describes a proposal, not a final rule. Separately, FTC guidance says materially false, misleading, or unsubstantiated earnings claims may violate Section 5 of the FTC Act.
This is U.S. federal consumer information, not legal advice or a finding about a particular company. State and non-U.S. laws may impose additional requirements.
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Quick Recap
Sources
- FTC, Business Guidance Concerning Multi-Level Marketing
- FTC Consumer Advice, Multi-Level Marketing Businesses and Pyramid Schemes
- FTC staff review of MLM income disclosure statements
- FTC announcement of proposed earnings-claim rule, January 13, 2025
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